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Market Update

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Posted: 10/23/2018 11:15 AM EDT

Stocks Retreat Amidst Below Par Earnings, Shift to Treasuries

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U.S. stocks are tumbling following selloffs in Europe and Asia, as softer-than-expected earnings reports from Dow members 3M and Caterpillar is exacerbating already skittish global sentiment. Treasury yields are falling and the U.S. dollar is ticking lower, in the midst of a full earnings week. Crude oil prices are lower and gold is higher. Asia finished lower and Europe is continuing to lose ground as the EU seemed to demand a new budget draft and Italy's PM ruled out a Plan B.

At 10:55 a.m. ET, the Dow Jones Industrial Average is down 1.6%, the S&P 500 Index is falling 1.8%, and the Nasdaq Composite is dipping 0.7%. WTI crude oil is decreasing $1.99 to $67.37 per barrel, Brent crude oil is losing $2.09 at $77.74 per barrel, and wholesale gasoline is down $0.05 at $1.86 per gallon. The Bloomberg gold spot price is trading $10.54 higher to $1,232.64 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—is down 0.1% at 95.96.

Dow member 3M Company (MMM $187) reported Q3 earnings-per-share (EPS) of $2.58, below the $2.71 FactSet estimate, as revenues dipped 0.2% year-over-year (y/y) to $8.2 billion, south of the projected $8.4 billion. The company lowered its full-year earnings and organic growth guidance, noting headwinds from foreign exchange. Shares are trading sharply lower.

Dow component Caterpillar Inc. (CAT $117) posted Q3 EPS of $2.88, or $2.86 ex-items, versus the expected $2.83, with revenues growing 18.0% y/y to $13.5 billion, above the forecasted $13.3 billion. CAT reaffirmed its full-year earnings guidance but noted higher material and freight costs, including tariffs. Shares are lower.

Dow member McDonald's Corporation (MCD $176) announced Q3 profits of $2.10 per share, compared to the estimated $1.99, as revenues declined 7.0% y/y to $5.4 billion, above the expected $5.3 billion. Global same-store sales rose 4.2%, versus the expected 3.6% gain. Shares are nicely higher.

Dow member United Technologies Corporation (UTX $128) posted Q3 EPS of $1.93 ex-items, compared to the forecasted $1.82, with revenues rising 8.8% y/y to $16.5 billion, north of expectations. The company affirmed its cash flow outlook. Shares are trading higher.

Dow member Verizon Communications, Inc. (VZ $57) announced Q3 earnings of $1.19 per share, or $1.22 per share ex-items, versus the $1.19 expectation, as revenues declined 2.8% y/y to $32.6 billion, slightly above the projected $32.5 billion. VZ reaffirmed its full-year guidance. Shares are higher.

Treasuries are higher as global uneasiness remains

Treasuries are higher, with the yield on the 2-year note declining 5 basis points (bps) to 2.86%, the yield on the 10-year note down 7 bps to 3.13%, and the 30-year bond rate decreasing 6 bps to 3.33%. The U.S. dollar is dipping with the global markets looking skittish after some disappointing earnings in the U.S. and festering geopolitical concerns.

The Richmond Fed Manufacturing Activity Index for September dropped to 15 from September's level of 29, and versus estimates calling for a slight decline to 24. A reading above zero depicts expansion. Schwab's Chief Investment Strategist Liz Ann Sonders offers her latest article, Sympathy for the Devil in the Details of Leading Economic Indicators, noting that leading economic indicators are showing no stress on the surface; but it’s what’s beneath the surface that often matters more to the stock market. She adds that global leading indicators are already signaling heightened stress and rising risk of recession. Liz Ann concludes that the spread between "soft" and "hard" economic data is eye-opening.

Although less on the radar with U.S. market volatility taking front seat, the U.S. midterm elections could come into play in the next few weeks. Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend notes in his latest commentary, Midterm Elections: What's at Stake in the House?, that markets seem to be anticipating a divided government after the election, so their reaction may be muted if there is a changing of the guard. He points out that other factors, including the Federal Reserve’s interest-rate policy, corporate earnings and the ongoing trade dispute with China, are more likely to influence the markets than the election outcome.

Europe lower as flight to quality on display

European equities have continued to fall from afternoon lows, following some disappointing earnings in the U.S. and Bloomberg reports strong language from the EU Commission requiring Italy to resubmit its 2019 draft budget and Italy's Prime Minister Conte ruling out a Plan B. Also, the global markets remain skittish on the heels of a downturn in Asian markets and as trade tensions between the U.S. and China continue to be elevated. Moreover, Italian fiscal uneasiness is persisting as the EU is expected to respond to Italy's latest budget deficit proposal today. The euro is little changed and bond yields in the region are losing ground, offset by rising rates in Italy. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, What's In Store For Global Stocks In Q4?, noting that with other market influencing factors like corporate earnings and central banks likely to perform as expected, it may be the positives, negatives and wildcards he describes that exert the most influence over global stocks in the fourth quarter. Jeff adds that we expect the balance of these factors to result in further gains for global stocks, but with the economic and earnings cycle getting late, paying attention to the risks is increasingly important. He concludes that investors should consider rebalancing their portfolios in line with long-term targets.

The U.K. FTSE 100 Index is down 1.6%, France's CAC-40 Index is decreasing 1.9%, Germany's DAX Index is dropping 2.4%, Switzerland's Swiss Market Index is declining 1.5%, Spain's IBEX 35 Index is dipping 1.0%, and Italy's FTSE MIB Index is trading 1.1% lower.

Asia mostly lower as global uneasiness continues

Stocks in Asia finished mostly to the downside, led by Japanese equities, with markets pondering whether China's latest round of fine-tuning is sufficient. Analysts have noted recent verbal interventions by Chinese officials to reassure markets and offer support to struggling non-state firms amid concerns for widespread margin calls related to shares pledged for loans, and the yuan at previous 21-month lows. Global uneasiness continued in the wake of the recent uptick in global bond rates, headlined by the rally in U.S. yields, while trade tensions between China and the U.S. remained escalated.

Japan's Nikkei 225 Index fell 2.7%, a two-month low, as the yen rose, while Australia's S&P/ASX 200 Index dropped 1.1%. Chinese stocks finished lower after yesterday's rally, with the Shanghai Composite Index nudging 2.3% lower and the Hong Kong Hang Seng Index dipping 3.1%. India's S&P BSE Sensex 30 Index traded 0.8% lower. Global markets remain volatile, and amid this backdrop check out our article Why Are Stocks Volatile When Things Seem to be Going Well?.

©2018 Charles Schwab & Co., Inc., Member SIPC. All rights reserved.

Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.

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